Month: November 2012

Texas Court Rules that Regardless of Fault, CEOs and CFOs Will Have to Pay Up Under Sarbanes-Oxley Section 304

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Gavel and Hundred-Dollar Bill

A Texas federal judge denied defendants ArthoCare CEO Michael A. Baker and CFO Michael T. Gluk’s motion to dismiss the SEC’s claim against them under Sarbanes-Oxley (“SOX”) Section 304’s clawback provision. Section 304 requires CEOs and CFOs to reimburse their company for any bonus or similar compensations, or any profits realized from the sale of company stock, for the 12-month period following a financial report, if the company is required to prepare an accounting restatement due to material noncompliance committed as a result of misconduct.

Baker and Gluk, who were not alleged to have participated in the misconduct that led to ArthoCare’s restatement, challenged Section 304 as unconstitutional, arguing that the SEC could not require them to repay bonus compensation and profits from stock sales for merely holding CEO and CFO positions during the time of the alleged misconduct. In particular, they argued that Section 304 is vague and is unconstitutional because it does not require a reasonable relationship between the triggering conduct and the penalty as is required by the Due Process Clause.

Judge Sam Sparks of the Western District of Texas rejected the Officer-Defendants’ constitutional arguments. Judge Sparks first held that Section 304 was not vague because it clearly referred to misconduct on behalf of the issuer of the allegedly false financial statement. Judge Sparks noted that Defendants “should have been monitoring the various internal controls to guard against such misconduct; they signed the SEC filings in question, and represented they in fact were actively guarding against noncompliance. As such, they shouldered the risk of Section 304 reimbursement when noncompliance nevertheless occurred.” READ MORE →

The New FCPA Guidance: It Only Took 35 Years to Get Here

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On November 14, 2012, the Department of Justice (“DOJ”) and Securities Exchange Commission (“SEC”) issued a much anticipated Resource Guide to the U.S. Foreign Corrupt Practices Act. Despite the fact the Guide is 130 pages, it is a surprisingly easy read. It provides a rare glimpse into the DOJ and SEC’s interpretation of the FCPA and the guiding principles for enforcement. Although the Guide will undoubtedly provide much awaited guidance on existing issues with which companies are currently grappling, it also serves to reinforce the well held belief that the DOJ and SEC are taking a hard line view on the FCPA.

The Guide provides insights into the government’s view on various aspects of the FCPA and covers issues surrounding both the Anti-Bribery Provisions as well as Books and Records and Internal Controls Provisions. Below are just a few key highlights.

Anti-Bribery Provisions

The Guide lays out explanations of the key provisions of the FCPA, and offers hypothetical examples that highlight the DOJ and SEC’s interpretation of those key provisions. For example, in a lengthy discussion regarding what “anything of value” means, the guide discusses the various forms that an improper benefit can take–from travel expenses to payments of cash through “consulting fees” or “commissions” to expensive gifts. Examples of proper gifts is also discussed: “Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law. Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.” READ MORE →

SEC Releases First Full-Year Report on the Dodd-Frank Whistleblower Program: No Speedy Recoveries for Whistleblowers

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Whistle

On November 15, 2012, the Securities and Exchange Commission released its Fiscal Year 2012 Annual Report on the Dodd-Frank Whistleblower Program (the “Report”), the first full-year report issued since the enactment of Dodd-Frank. The Report analyzes the 3,001 tips received over the last twelve months by the Commission’s Office of the Whistleblower (“OWB”) , which is responsible for the implementation and execution of the Commission’s whistleblower program. The Report also provides additional information on the whistleblower award evaluation process that resulted in its first (and only) award issuance in August 2012.

Activities of the Commission’s OWB

The OWB was created pursuant to Section 924(d) of the Dodd-Frank Act. OWB reviews and processes whistleblower tips through the Commission’s Tips, Complaints, and Referrals (“TCR”) System, leveraging resources of the Commission’s Office of Market Intelligence to evaluate tips and assign them to the appropriate division. OWB works closely with the Enforcement Division throughout the investigative process, serving as a liaison between the whistleblowers or their counsel and Enforcement staff. OWB arranges meetings between whistleblowers and investigators or subject matter experts within Enforcement to advance investigations. OWB also communicates with other agencies’ whistleblower offices, including the IRS, Department of Justice, Commodity Futures Trading Commission, and the Department of Labor’s OSHA. READ MORE →

Supreme Court Hears Argument in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds

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Securities class action lawyers are looking to the U.S. Supreme Court this term to clear up an issue that has been at the center of several prominent securities class actions, specifically, what is the standard for class certification where the class members’ reliance on defendants’ alleged misstatements is presumed under the fraud-on-the-market theory of reliance. Last term, in a class action ruling in an employment case, Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 1541 (2011), the Court signaled that class certification may require “a preliminary inquiry into the merits of a suit,” singling out elements of the fraud-on-the-market theory as an example.

On November 5, the Supreme Court heard argument in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, a securities fraud putative shareholder class action presenting the question of how far a court should consider a merits issue when deciding whether to certify a class. The appeal in Amgen is from a Ninth Circuit decision that affirmed the district court’s order certifying a plaintiff class of purchasers of Amgen stock. Defendants opposed class certification on the ground that the rebuttable presumption of reliance under the fraud-on-the-market theory requires not only that the market for Amgen stock was efficient, but that the alleged misstatements were material. Defendants offered evidence that the alleged misstatements in the case were immaterial. Therefore, according to defendants, reliance could not be presumed, and the proposed plaintiff class could not be certified because common issues did not predominate. The Supreme Court took the case in order to determine whether the district court was correct to disregard defendants’ evidence of immateriality on the ground that materiality is an issue appropriately considered at trial or at summary judgment rather than at the class certification stage. READ MORE →

SEC Suffers Defeat in Trial Against “Break the Buck” Executives

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A federal court jury in Manhattan returned verdicts on Monday, November 12, largely exonerating the two most senior Reserve Management Company executives in a Securities and Exchange Commission enforcement action accusing them of fraud.

The SEC alleged that Bruce R. Bent, the company’s CEO, and his son, Bruce R. Bent II, the company’s president, as well as their investment advisory firm Reserve Management Co. and Resrv Partners Inc., had defrauded investors and the fund’s trustees by falsely claiming they would support the fund financially when it faced a run by investors after Lehman Brothers’ bankruptcy (the fund held about $785 million in Lehman debt on the day it filed for bankruptcy). The bankruptcy announcement caused investors to flee the fund, leading the fund to “break the buck,” i.e., to have a net asset value (“NAV”) of less than $1 per share. The SEC alleged that, on the morning after Lehman announced its bankruptcy, the Bents falsely assured investors and the trustees that they would use money from their firm to support the $1 NAV.

Following a trial lasting approximately a month, the jury found the elder Bent not liable on all counts and the younger Bent not liable on six of seven counts. The only count on which Bent II was found liable was a negligence-based claim, not the more serious claims that he had “knowingly and recklessly” defrauded investors and the trustees. The jury found the Bents’ two entities liable for the more serious scienter-based fraud charges. The case will now proceed for United States District Judge Paul Gardephe to determine what relief and sanctions, if any, are warranted against the entities and against Bent II for the one negligence-based count on which the jury found him liable. READ MORE →

President Barack Obama’s Win Also a Win for the SEC and the CFTC

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The U.S. Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) can breathe a little easier after President Barak Obama’s re-election on Tuesday, November 6, 2012, according to legal scholars and attorneys.

Presidential Candidate Mitt Romney voiced his criticisms of the Dodd-Frank Act during the October 3, 2012, presidential debate, promising to repeal and replace Dodd-Frank. While the political climate in the United States Congress made repeal of Dodd-Frank unlikely, Romney’s administration may have eliminated or weakened provisions of the Act, appointed SEC and CFTC heads who were less interested in aggressive enforcement, and reduced both agencies’ funding.

Legal scholars and attorneys predict that President Obama’s re-election will allow the SEC and the CFTC to continue their aggressive enforcement campaigns of 2011. President Obama’s re-election is particularly important for the CFTC, which Dodd-Frank awarded new oversight powers. The Romney administration may have eliminated key provisions of the Act, returning the CFTC to the limited role it exercised under President George W. Bush. Under President Obama, the CFTC is likely to continue its expanded watchdog role and receive the funding necessary to do so. READ MORE →

New Wave Of Lawsuits Targeting Disclosures On “Say-On-Pay;” Plaintiffs Use M&A Litigation Tactics To Attack Executive Pay

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Letter to Shareholders

The plaintiffs’ bar has taken new aim at public companies’ annual meetings: filing lawsuits to enjoin annual shareholder approval of stock plan proposals and “Say-On-Pay” (“SOP”) votes, typically arguing that the proxy disclosures regarding these topics are inadequate. Dozens of cases have been filed this year to date. The Santa Clara Superior Court recently denied plaintiff’s attempt to delay Symantec’s SOP vote, finding no precedent for such an injunction. Yet new cases continue to come.

In Symantec, plaintiffs argued that proxy disclosures failed to provide enough information to allow shareholders to make an informed decision regarding executive compensation proposals. Plaintiffs argued that shareholders needed more detailed information, including an analysis conducted by the company’s compensation consultants and any compensation risk assessment undertaken by the company. Symantec v. Gordon, et al., Case No. 1-12-CV-231541 (Cal. Santa Clara County Superior Court). The Symantec Court disagreed.

The Symantec case suggests that judges will look to industry practices in evaluating the adequacy of disclosures on executive compensation. The court considered an expert opinion from a Stanford Professor (Robert Daines) surveying disclosures made by other companies in the industry. Professor Daines concluded that Symantec’s disclosures were at least as detailed as the industry standard. Lacking any factual support or legal precedent for such an injunction, the court denied the motion. READ MORE →